New World Restaurant Group, Inc.

views updated

New World Restaurant Group, Inc.

246 Industrial Way West
Eatontown, New Jersey 07724
U.S.A.
Telephone: (732) 544-0155
Fax: (732) 544-1315
Web site: http://www.nwcb.com

Public Company
Incorporated: 1992 as New World Coffee, Inc.
Employees: 675
Sales: $45.7 million (2000)
Stock Exchanges: OTC
Ticker Symbol: NWCI
NAIC: 722211 Limited-Service Restaurants; 311920 Coffee and Tea Manufacturing

Originally established in the early 1990s as a chain of coffee bars, New World Restaurant Group, Inc. has evolved into the United States’s largest operator of bagel stores. With its corporate headquarters located in Eatontown, New Jersey, New World has approximately 800 outlets that it licenses, owns, or franchises across 34 states and Washington, D.C., operating under such brand names as New World Coffee, Willoughby’s Coffee & Tea, Chesapeake Bagel Bakery, Einstein Bros. Bagel, Manhattan Bagel, and Noah’s New York Bagels. The combination of bagels, sandwiches, salads, coffee, as well as other food items, allows New World’s various brands to attract customers throughout the day, with a particular emphasis on breakfast and lunch. To provide a consistent product, the company supplies its stores with frozen bagel dough, which is then baked on the premises. It also provides cheese spreads and specialty coffees. In November 2001, New World was delisted from the Nasdaq national market, the advisory panel for which cited violations relating to its purchase of the Einstein/Noah Bagel Corporation. The company was appealing that decision while seeking listing on other exchanges.

New World Coffee Established in 1993

New World’s founder, Ramin Kamfar, was born in Iran, and emigrated to the United States with his family. He earned an MBA from the Wharton School of Business, then went to work on Wall Street with investment bank Lehman Bros., where he became a vice president before the age of 30. Despite earning a salary in the range of $500,000 a year, Kamfar had a dream of building his own company. Aware that gourmet coffee chains were spreading rapidly on the West Coast, he decided to apply the idea to the East Coast. Rather than following Starbucks’ Italian-style format, in which patrons stood or simply left with their coffee, Kamfar drew on the model of the London coffeehouses and Paris cafés, which served as neighborhood gathering places where people lingered and sat at tables.

In October 1992, Kamfar incorporated New World Coffee in Delaware and soon quit his job. “The people at Lehman thought I was crazy,” he recalled in a 1997 Success magazine profile. “They reminded me that I was a vice president making a lot of money in the midst of the biggest boom in Wall Street history. They said, ’You’ll never get New Yorkers to pay $3 for a cup of coffee. ’”While his years at Lehman provided Kamfar with valuable financial knowledge and important contacts, his only retail experience was a spell during college when he worked at a Fotomat. Kamfar didn’t even drink coffee, instead preferring tea. Nevertheless, he raised $250,000 from friends and former colleagues, as well as tapping into his savings, and in 1993 opened the first two New World Coffee shops in the West Village of Manhattan, serving a variety of coffees from around the world—Africa and Indonesia in addition to South America. Hence, the New World name.

With the goal of becoming the Starbucks of the East Coast, Kamfar opened new stores at a steady pace during the first three years of New World’s existence. By 1996, the company owned 27 stores, and in February of that year Kamfar took the company public in order to raise capital for further expansion. Originally he had planned to sell stock in December 1995, but investor indifference prompted a delay. Even when the offering was made three months later, investors were not especially interested. Starbucks had been the only coffee-bar stock that really captivated the market, while others had enjoyed mixed results. In general, investors viewed New World as a been-there-done-that opportunity. The company had not yet turned a profit, and ambitious plans to open another 40 stores in New York and Philadelphia over the next year were not enough to kindle much enthusiasm. New World sold 2.5 million shares at $5.50 per share, grossing some $13.8 million, but by the end of the first week of trading on the Nasdaq the stock fell to 5³/16. New World also sold $4 million worth of convertible preferred securities.

Kamfar used the money he raised to expand his business through external growth in 1996. He purchased three Coopers Coffee Bars, an early chain on Manhattan’s Upper West Side, for $242,500 in cash and a $770,000 note. He then acquired Willoughby’s Coffee and Tea for $3.1 million. Not only did New World add five new locations, it gained Willoughby’s New Haven, Connecticut, roasting plant that allowed the company to produce 20 types of coffee. While New World had opened nearly 30 stores in three years, and by the end of 1996 boasted 40 overall, Starbucks was now rolling out 30 new stores each month and acquiring choice locations in the New York City area, often paying above the market rate simply to establish a presence. Starbucks’ advantage in economies of scale, as well as its head start, meant that New World could not hope to become the leading coffee bar operator in the metro area. Already it was relegated to fighting for position on a second tier, at the same time the price of its stock was steadily declining. Clearly a change in strategy was in order.

New World Coffee Begins Selling Bagels

In 1996, the bagel business was taking off, with several chains expanding rapidly across the country. Kamfar decided to try selling bagels in two New World stores and was encouraged by the results. While coffee shops like Starbucks enjoyed most of their business early in the day, and bagel shops did well through the lunch hours, New World found that by adding bagels, bagel sandwiches, and pastries it was able to sell all day.

One of the new concept stores located in Manhattan’s garment district experienced a 71 percent increase in annual sales, from $500,000 to almost $800,000. By the summer of 1997, Kamfar decided to convert the entire 38-unit chain to the new format, requiring a $50,000 investment in each store to outfit the kitchen with baking ovens, along with proper refrigeration and venting. To reflect this shift in focus, the company’s name was then changed to New World Coffee & Bagels, Inc. in September 1997.

New World also began a transition from a predominantly urban chain to a suburban one, from being entirely company-owned to embracing a franchise system. Kamfar’s goal was to open 500 franchises in the next five years. To help him execute this plan, Kamfar hired experienced executives from other franchise operations such as Wendy’s and Starbucks. He also invested in a software system to track the daily expenses and incomes of franchises, in order to keep an eye out for weak links in the chain. New World’s first franchise opened in 1997. Moreover, the company signed a deal with New York Food Ventures GMBH, a German company, to create a café in Munich and the right to open as many as 100 stores over the next five years. Despite these developments, the price of New World stock continued to sag, dipping as far as $.90 a share. Kamfar spent $27,500 of his own money to purchase shares at $1.25 in order to bolster the price and make a statement about his confidence in the company’s long-term prospects. He felt that New World was undervalued by investors because it was overlooked. “I know how those guys on Wall Street think,” he told the press in August 1997, “Unless you are doing $30 million a year, they are not interested in you. Because we are relatively small, we are off everyone’s radar screen. But we expect that to change in the next six to eight months.” Over the ensuing months, New World would post its first profitable quarter and solidify its commitment to bagels by acquiring one of the leading chains, Manhattan Bagel, at a bargain price.

Manhattan Bagel

The founders of Manhattan Bagel, brothers Jason and Andrew Gennusa, were first involved in a Dunellen, New Jersey, take-out chicken restaurant, Chicken Holiday. Looking to enter the breakfast market, while not conflicting with their dinner business, they turned to bagels. At the time they established Manhattan Bagel in 1987 very few bagel shops were to found outside of New York City. When the company embarked on a franchising campaign in the early 1990s, Jack Grumet took over as its chairman and CEO. He had earlier founded Jo-Ann’s Nut House, which he built into a 149-unit chain. To fuel Manhattan Bagel’s growth, the company made an initial public offering of stock in 1994, selling 900,000 shares at $5 a share. Manhattan grew from a chain of 40, with only three company owned, then spread from Massachusetts to Georgia, increasing to 152 stores in 1995 and almost 300 in 1996. A portion of that growth was accomplished by buying up smaller bagel chains. Unlike New World, Manhattan Bagel caught the attention of investors, who bid up its stock to a high of $29 in June 1996. Bagels were piquing everyone’s interest, fueled by studies indicating that the U.S. per-capita consumption of bagels increased from 2.5 pounds in 1988 to 3.5 pounds in 1993 and to 4.5 pounds in 1995. To tap this rising trend, other bagel chains such as Bruegger’s and Einstein, and a host of smaller competitors, rolled out new stores at a furious pace, essentially outstripping demand. Moreover, delis and corner stores, as well as non-traditional players like New World Coffee, also began to sell bagels.

Company Perspectives:

The thoroughness New World brings to the coffee selection process is unique. After the harvest of each coffee variety, we collect samples of green (unroasted) coffee from our sources. We are only interested in the highest grades, and advise our sources to send us only the best they have. Numerous samples are gathered, sometimes resulting in so many that they cannot be “cupped” in one or two sittings. When all the samples have arrived, our roastmaster roasts and de-identifies each so we can proceed with blind tastings. We do not want to be biased by a coffee’s name, reputation, cost or marketing. We are only interested in one thing: which coffee tastes best. This is what we want for our customers. Upon conclusion, the samples’ identities are revealed, and we then go to market to acquire the best of the best.

The prospects for the bagel business altered dramatically in June 1997 when Dunkin’ Donuts announced that its 2,000 stores would begin to sell bagels. This, in one stroke it became the largest bagel retailer in the nation. Manhattan Bagel’s situation was further complicated by discovered irregularities in the accounting methods of an acquired subsidiary, forcing the company to restate its first quarter revenues. As a result, the company’s stock was punished and never recovered. By November 1997, Manhattan Bagel was forced to file for reorganization under Chapter 11. The price of Manhattan Bagel stock dipped below $1 and eventually traded for pennies.

Manhattan Bagel Acquired

In November 1998, New World’s reorganization plan for Manhattan Bagel was approved by creditors in federal Bankruptcy Court. The $21.8 million purchase agreement included a $3.5 million payment to First Union National Bank, Manhattan Bagel’s only secured creditor, $11.5 million to unsecured creditors, and the assumption of $5 million in debt. Not only did New World add over 300 franchises, it gained two bagel-manufacturing facilities that could supply its New World outlets and a training facility for managers, a so-called “Bagel University.” Moreover, New World closed its New York operation and made Manhattan Bagel’s less expensive Eatontown, New Jersey, offices its new corporate headquarters. Kamfar, who took over as CEO and chairman of the combined businesses, also quickly moved to acquire Manhattan Bagel’s master franchise territories in western New York, Florida, and the region of Maryland, Virginia, and the District of Columbia.

In April 1999, the company changed its name to New World Coffee-Manhattan Bagel Inc. To improve its lunch business it added new specialty sandwiches, available on rolls and wraps in addition to bagels. Coffee-flavored smoothies using New World Coffee extract were also incorporated into the offerings of Manhattan Bagel stores. New World then continued in 1999 to pursue further external growth. In July it acquired Chesapeake Bagel Bakery from AFC enterprises, parent company of Church’s Chicken, Popeye’s Chicken & Biscuits, Seattle Coffee Co., and Cinnabon. As a result, New World added 89 stores and gained entry into ten new states. In May 2000, the company purchased the assets of New York Bagel Enterprises and its Lots ’A Bagels affiliate, adding approximately 25 stores. By the end of 1999 its 377 units placed New World second among bagel-café operators, trailing only Colorado-based Einstein/Noah Bagel Corp. and its 540 units. New World’s focus had clearly shifted from coffee to bagels. In 1999, it sold six outlets to Starbucks and closed three others to reduce the number of coffee shops to 39. Although Kamfar expressed confidence in the New World brand, he admitted that he saw more opportunities in bagels than coffee.

Kamfar now began talking about a 1,000 bagel store chain. He told the Wall Street Journal, ’The persons who created the 1,000-store chain will be the Starbucks of the industry.” He also felt that it was more economical to buy and convert existing stores than to build. Due to acquisition costs, New World had yet to post an annual profit, but because it had already gone through a restructuring process, Kamfar felt that the company was in a better position than Einstein/Noah to reach the next level. While New World lost $7.5 million in 1998, Einstein/Noah lost $204 million. In October 1998, Einstein/Noah stock was delisted by the Nasdaq for failing to meet financial requirements, and by the end of the year was trading in the $.65 range. Einstein Bagels was created in 1995 by Boston Chicken, which combined four small bagel chains. It then acquired Noah’s New York Bagel Inc. and by the end of 1996 boasted 315 stores. The company continued to grow, passing the 500-unit mark, but was simply unable to find the right business model to maintain a chain of that magnitude. By April 2000, it filed for Chapter 11 bankruptcy protection.

Despite New World’s relative strength in the bagel industry, and a 1999 profit of $2.42 million, investors continued to show little interest, and the company’s stock languished around $2 a share. Restaurant stock in general was faring poorly, and all the major bagel chains had gone bankrupt. Nevertheless, Kamfar was confident that New World had developed a way to make a bagel chain successful, relying in large part on improving margins by manufacturing the chain’s own bagel dough and coffee beans. Moreover, the company’s franchise approach did not require a significant outlay of capital. The company continued to post improving results, netting $6 million in 2000. In 2001 New World pursued the acquisition of Einstein/Noah, finally making a $190 million winning bid in an auction conducted by the U.S. Bankruptcy Court in Phoenix, Arizona.

A number of Einstein/Noah stores had already been shuttered, but the 460 that remained pushed New World above the 800 unit mark, making it the undisputed leader in the retail bagel industry, more than three times the size of Bruegger’s, its closest competitor. Kamfar hoped that New World would soon gain respect from investors. “The Street, I think, doesn’t understand us,” he told Nation’s Restaurant News, ”But once we start showing our numbers, the Street responds to that. What will be important is to tell our story, and we have an attractive story to tell.”

Key Dates:

1992:: The company is incorporated.
1993:: First New World Coffee shops opened in New York City.
1996:: New World begins selling bagels.
1998:: Manhattan Bagels is acquired.
1999:: Chesapeake Bagel Bakery is acquired.
2001:: Einstein/Noah Bagel Corp. is acquired; company’s name changes from New World Coffee-Manhattan Bagel to New World Restaurant Group; stock is delisted from NASDAQ.

Kamfar now looked to accelerate store openings to become one of the top players in what he called the “fast casual” sandwich business. In order to accomplish this goal he decided to step down as chief executive officer, opting to serve as chairman of the board in order to focus on strategic and financial matters. The new CEO he hired was a former Boston Market and KFC executive, 42-year-old Anthony D. Wedo. Subsequently the company again changed its name, becoming New World Restaurant Group in August 2001. Whether Kamfar would realize his ambitious goals or not, his accomplishment of building a bagel empire out of two Greenwich Village coffee- houses in less than ten years, at the very least, vindicated his decision to quit a lucrative Wall Street career.